Y, Inc. has no debt right now. You project that this company can generate EBIT of 8 million per year for the next few years. There is no depreciation. You plan to attempt a leveraged buyout of this company. Your plan is to operate the company for three years and sell the company then. You think the company can be sold at price to EBIT ratio of 9.5 three years from now. You plan to borrow 60 million in three-year interest only loan and putting 10 millions of your own equity to buy the company. (Note that the loan is interest only and you do not plan to retire any debt before you sell the company. Your interest payment will remain the same for the three years.) The interest rate on the loan is 10% and the tax rate is 40%.
1. What will be the selling price of the company in three years (in millions)?
2. What is the cash flow to the equity investor in the first year (in millions)?
3. What is the cash flow to the equity investor in the third year in millions (the final year of the project, including sale proceeds and loan repayment)?
4. What is the rate of return to you as the equity investor (in percentage)?